Construction Partnership Pitfalls

If your going into business with someone else there are a few thing you should consider that are very important. Often times when starting a business, joining a business or bringing in new people to an existing business there is a great deal of excitement. There can also be a tendency for partners to overlook minor details in the name of building trust and goodwill. Additionally , sometimes these details can be overlooked due to simple inexperience. Other times there can be malicious intent.

However small these details seem at first, trust me they are not. Relationships, both business and personal grow and evolve. Business partnership typically fail due to extreme difference in opinion. After all working together as a team we are stronger, smarter and better. But when one partner does all the work and one partner spends all the money it is easy to see how the situation can explode.

Who has the license and where does the buck stop?

In the state of California contractors are required to obtain a license. This means that someone is ultimately responsible. Either partner, a corporation or even an employee can hold the license. The person holding that license has a special responsibility.

Imagine if you are the license holder in a partnership and your partner is incorrectly performing work. After the work is performed you are sued by the customer. Both of you would be on the hook financially however you as the license holder could lose your license because of someone else’s mistakes.

Its important for all parties to understand and accept that the licensee(s) can stop work on any project within the organization without permission from the other partners to ensure that work meets the legal requirements set by the CSLB and building codes.

How are profits and losses divided?

This is probably the biggest issue people think about. Is everyone paid a salary, is everyone issued dividends or pay based on performance. Because your company may grow, shrink and change over time its best to start right from the beginning with a fully scale- able.

How are wages decided? Imagine two partners go into business. One is a CPA and the other a licensed general contractor. The CPA manages the office and the contractor finds leads and generates proposals. Who is more valuable? How should pay be decided?

Besides pay how should profit be decided? In this situation the office manager is barely working 6 hours a day while the partner who does the estimating is working 10 hours a day and has produced a profit of close to $500,000 for the year on top of the normal wages. Should the profit be split equally?

Another situation is a company where two partners are both licensed. They both find leads and producing estimates. One partner’s projects made a profit of $200,00 above his pay and the other partner made a profit of $325 above his pay. Should this profit be paid equally in stock dividends to both partners?

Solution – If the partner is an estimator they should be paid estimator wages. If the partner in the business is a CPA they should be paid CPA wages.These wages shouldn’t be made up numbers. If someone else can be hired to do the work for less than the wages should reflect that. Partners should receive performance pay for working within the company. In most construction companies the lead generation, estimating and project management aspect of the job are the most intensive and skill oriented. All projects should pay a percentage of the profit to the the lead generator, the estimator and the project manager.

How much will be re-invested?How will you settle disagreements on investing or not investing money into the company and what to invest in?

So the company has profited $100,000 for the year and you need to decide how to spend the money. One partner is late on his mortgage and needs the money desperately because of poor financial planning. One partner would like to re-invest the money into equipment and an investment property.

In another similar situation the company has profited $100,000 and both partners have decided to split $50,000 between them and reinvest the other $50,000. One partner want to re-invest in a new vehicle and dislikes updating his familiar computer systems. The other partner wants to invest in new software and marketing.

Solution – Partners must decide on a set payment plan up front. Bad financial planning by one person shouldn’t affect the whole company as in the first scenario. It’s also best to prevent anyone from borrowing money from the company or taking early payment. Its best to plan on extracting payment in full unless a mutually agreed investment amount is decided upon. If the investment decision cannot be decided upon each party should be able to choose their investment decided by portion.

What is your obligation to pay overhead costs?

In the course of running a business one partner has made a tremendous amount of money on a windfall profit. Fortunately the partner had a great partnership agreement and he kept his hard earned profit. Now he spends more time planning his next vacation than working. However the building mortgage is due, the accountant needs a paycheck and the lights are still on. Should partner shoulder the expense of running business while the other partner is barely working?

In another turn of events while the partner is spending their windfall profits on a tropical vacation another one of their jobs they left to a project manager looses $20,000. Where does that money come from? Can the partner still working claw any of those profits back?

Solution – Both partners should maintain a liquid balance of profits not yet paid to them. This amount of money should be left in place to cover losses on future jobs. Also there should be an agreement that certain overhead costs are split and paid from profits equally by all parties.

How will you decide to meet special needs of partners?

Your business partner wants to bring his idiot son or daughter on board and pay them double the going rate.

Your business partner has been using the gas card for their company vehicle to fill his wife and children’s car.

Your business partner needs the kitchen remodeled because they prefer to prepare their own meals.

Solution – Business should never make special arrangements for a partner. It’s a special form of payment being made to that partner at the loss of the other partners. Ask yourself if you would make the same concessions for your best employee. If the answer is no then they should not be made for the partner. If they are made then a special cash value payment should also be made to the other partners in compensation.

What are the consequences of embezzling 1 million dollars. What are the consequences of embezzling 100 dollars?

What would you do if you find out your partner has been skimming money from jobs? Or asking your employees to work at their house and record another job address on their time cards? What if their is $100,000 missing due to accounting fraud? What if they are running jobs under the company license for cash on the side?

These are examples of big losses. But most embezzlement and fraud starts small and grows as the thief becomes confident and dependent on the income. What will you do if you find out they are filling up personal vehicles with the company gas card? What if you find out they are taking office supplies.

Solution – No matter how trustworthy your business partner appears you must always protect the company from theft. A partnership agreement should provide a repayment and penalty clause for any small theft and should also allow you to cut off access the financial accounts in the case of something big. In a worst case scenario you would need an injunction from a judge to stop your partner from withdrawing money. Having a crystal clear partnership agreement will help.

What is your partners obligation to you if you become sick or injured?

In a horrible scenario your partner is in a head on car collision. You are the CPA running the office and your partner in the hospital ran the jobs and did the estimating. Worse the doctors say no recovery is possible. These types of situations can play out and often no one is prepared. In this situation without help the remaining business partner could end up loosing money n the project and going into debt. His comatose business partner and family would also be responsible for this debt.

Solution – Its important to have insurance not only for the partners family but also for the business. This allows the business to unwind by hiring emergency help to finish up project that are underway.

How would you go about separating the business?

After 20 of running a successful business you are ready to go your own way. This is a major problem because rarely do people plan for after. Whats the value of the company stock? Will the company still function without the partner? Will it still be as profitable, less profitable or more profitable? If someone offers to buy your shares can you sell them? Can you sell them if your old partner wont agree to the reasonable term of the new partner?

Solution – Its important from the start to make sure that the companies tangible assets, business support system and client accounts are valued properly from the start. It should also be as easy as possible for either party to leave and take their equity with them